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Mining Focus: A Brave New Era for Mining the DRC
Julian Hewitt
Overview
China's recent announcement of a USD5 billion loan to the DRC is its largest raw material investment on the African continent to date. It is also the boldest move yet to transform the mining sector of a country that holds some of the largest mineral reserves on the planet, but still lags behind as of one of the world's poorest nations.
The loan agreement is earmarked at improving the DRC's national infrastructure and promoting mining development in return for access to mining concessions. The timing of China's intentions comes at a formative stage of the DRC's road to recovery from a 3-decade long period of civil war and unrest.
It also comes at a time where multinational mining companies are actively beginning to develop DRC mining strategies to secure stakes to its mineral riches.
Emergence from a devastating civil war
The DRC is considered to have amongst the largest untapped mineral reserves in the world. This includes an abundance of copper, cobalt, diamonds, gold, coal, coltan, germanium, manganese, tin, uranium and zinc. Yet, these riches have also been one of the primary catalysts for a protracted period of conflict as rival factions competed for controlling stakes in this wealth.
The country is slowly emerging from this chaotic period. In 2001, peace agreements were reached with large parts of the country and the current government has embarked on the protracted process of revitalizing the country's most basic needs. Furthermore, in 2007 the DRC had its first democratic elections since 1963 were the incumbent president, Joseph Kabila, was reelected into office.
This strife has had a disastrous effect of the DRC's human development and public infrastructure. According to a recent OECD report, 80% of the DRC's 57 million inhabitants lived on less than USD0.2 per day in 2002. Only 6% of the population had access to electricity and less than 5% of the country's 57 700km road network was tarred.
The Chinese loan agreement provides for USD3 billion that will help meet some of these infrastructural objectives. China have committed to improving public health care and educational facilities by constructing 31 hospitals, 145 health clinics and 2 universities.
In addition, the loan will also support transport infrastructure necessary to exploit the DRC's resources. The DRC is poorly connected to the rest of the world. It only has 40km of coastline and a virtually non-existent transportation network. Planned projects include a 3400 km highway that will link the DRC up with the Zambian border in the south and a 3200km railway connection Matadi on the Atlantic Ocean.
Untapped Mineral Wealth
Despite its mineral wealth, the DRC's mining sector currently contributes only 10% to the economy. The DRC's entire mined output is exported, bringing in much needed foreign exchange into the country. These exports comprise mainly of diamonds, copper and cobalt.
The mining sector in the DRC is dominated by Gécamines, a large state-run enterprise. However, the long civil war has severely hampered Gécamines' mining capacity and of the 50 minerals discovered in the DRC, only 10 are currently mined by the company.
Diamonds are of particular importance as they constitute three-quarters of the DRC's export revenues. According to the latest OECD country report, the diamond industry has experienced strong growth since the local diamond market was deregulated in 2001. The 2003 mined output for diamonds was just under USD600 million and accounted for 27 million carats.
Copper and its co-product, cobalt, is another prominent feature of the DRC mining sector. The southern province of Katanga is part of the Central African Copperbelt that stretches from Angola into Zambia. A South African Development Community (SADC) review into the DRC's mining sector estimated reserves to be over 55 million tons for copper and 3.6 million tons for cobalt.
Mineral production is still incredibly limited with 2004 production of copper representing only 0.13% of total reserves while cobalt production was a paltry 0.25%. DRC copper is of a particularly high grade, comparing favourably with similar ore mined in the Americas.
While gold mining has a long history in the DRC, in recent years the sector has been overshadowed by rebel faction involvement. As a result production has been very erratic and dominated by black market activities. The majority of gold reserves are found in the eastern and north eastern parts of the country.
In addition to gold, the DRC is the location for one of the world's highest grade unexploited copper silver bodies.
Mining Legislation and Developments
The drafting of the Mining Code in 2003 was an encouraging sign for international mining operations in the DRC. The Mining Code was created together with the World Bank and allows greater transparency and efficiency for mining companies when obtaining mining licenses. It also protects mining rights by allowing for various recourses in the event of disputes.
Another key development is that the DRC is currently in the process of reviewing 60 existing mining contracts to assess their legitimacy. In a country that has struggled for many years with a weak government and entrenched corruption, many mining contracts where awarded in opaque circumstances and the reappraisal of these contracts is an attempt to bring greater transparency to mining practices in the DRC.
While the process has a number of severe critics, notably those mining companies who are currently under review or will be most affected by any contractual irregularities, the process is still perceived to create a more stable future mining environment.
Chinese Presence and Opportunities
A number of Chinese companies have already made small mining investments in the DRC. One such company is Norinco. Through Wanbao Mining Limited, Norinco was involved in the construction of a copper and cobalt smelter that commenced in 2005. The project was valued at USD21 million.
Chinese construction company, MCC, has been commissioned to complete the KOV copper project that is expected to come online in 2009. Another large Chinese mining company, Jinchuan, has also invested in a small DRC cobalt mining joint venture.
China's loan agreement with the DRC can be expected to offer many more opportunities for Chinese companies to exploit its newly awarded mining concessions. The first wave of companies to benefit will naturally be Chinese construction enterprises and SOEs.
It can also be anticipated that China's investment in the DRC will draw on the strengths and experience gained from their copper mining operations in Zambia. Zambia is home to China's first special economic zone in Africa and also the location of large copper investments. Its close proximity to the DRC provides China the opportunity to further utilize the TanZam Railway and the Benguela Railway Line - currently undergoing rehabilitation - to transport mined products to the Indian and AtlanticOceans respectively.
Future Prospects
The DRC is still a very risky environment for mining companies eager to exploit its abundant resources. However, China has already shown a great risk tolerance in Africa through energy and raw material investments in unstable countries such as Sudan and Zimbabwe.
What China is capitalizing on is its strong political will and diplomatic relations to overcome the numerous challenges its mining operations will face. China's ambitious infrastructural plans are also a crucial element of successfully exploiting the DRC's minerals in an essentially landlocked country with an inadequate rail and road network.
For the DRC to be a successful long-term investment for China, its mining related investments need to be linked to broader macro economic stability in the country. In this regard, timing is crucial. Without it, not even the vast scope to which China is approaching the DRC will not be sufficient to guarantee it success.
(This article appeared in the November 2007 edition of the China Mining Journal)
Julian Hewitt, Consultant
THE BEIJING AXIS
China Business Solutions
julian@thebeijingaxis.com
